The Fuddruckers on Desert North near N. Mesa is for sale. (VICTOR CALZADA / EL PASO TIMES )

The demise of El Paso's once-popular Fuddruckers hamburger restaurant franchises, two of which are closed and a third likely to close soon, is tied to alleged embezzlement schemes which allegedly robbed the franchise owners of more than $400,000, the owners claim in a lawsuit in federal bankruptcy court.

The three El Paso Fuddruckers properties are scheduled to be sold through a bankruptcy-court sanctioned auction this month.

The El Paso Times last month reported the closure of two of the franchised restaurants after Fuddruckers' parent company, Houston-based Luby's Inc., canceled franchise agreements for the restaurants.

Companies tied to the three El Paso Fuddruckers and operated by El Paso brothers David and Hilel "Hely" Chowaiki, were in financial trouble by 2010 -- six years after the first El Paso Fuddruckers opened -- as a result of the alleged embezzlement schemes and mismanagement by the man they hired to run the restaurants, the owners allege in a lawsuit filed in 2012.

The brothers filed for bankruptcy protection in May 2011 for DHC Realty, their company which owns the restaurant properties. The brothers also own sportswear manufacturer Basic Sports Apparel in Central El Paso.

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In May 2012, the brothers filed a lawsuit in federal bankruptcy court alleging that Armando Armendariz, former director of operations for the three Fuddruckers, along with his wife, Yvette Armendariz, and his brother, Hector Armendariz, who also worked for the restaurants, "engaged in a broad based scheme to embezzle and steal from the restaurants."

The lawsuit also claims Armando Armendariz was rarely present at the restaurants, leading to mismanagement, which "hurt the restaurants' image and cost them customers."

REPORTER

Vic Kolenc

The Armendarizes, in documents filed in bankruptcy court, denied all allegations made against them.

"We have yet to see any proof of the allegations," Michael Nevarez, an El Paso lawyer representing the Armendarizes, said last week. "My clients are owed $100,000 by David Chowaiki (via a loan made to him), and rather than pay it, they mustered up the allegations that we feel are baseless.

"The reason (the) Fuddruckers (franchisor) took away the franchising agreement is not due to fraud or embezzlement on my clients' part," Nevarez said.

The Chowaikis are not commenting on the lawsuit or their bankruptcy filing, said Corey Haugland, an El Paso lawyer representing the brothers.

The brothers discovered the alleged embezzlement schemes in early 2012 after Armando Armendariz made an unsolicited offer to buy the Zaragoza restaurant, and the brothers then fired them, the lawsuit reports.

The Fuddruckers at 1887 N. Zaragoza, near Montwood, on the far East Side, closed last month, and the one at 5030 N. Desert Blvd., near Mesa and Interstate 10, on the West Side, closed Oct. 30, after Luby's, the Houston company that owns the hamburger restaurant chain, canceled the Chowaikis' franchise agreements for those restaurants.

The Chowaikis are still operating the Fuddruckers at 7942 Gateway East, near Yarbrough Drive, the first Fuddruckers in El Paso, but that location will probably close after the property is sold, Haugland reported.

The properties are scheduled to be sold in a Jan. 13 auction, and the bankruptcy court judge is scheduled to hold a hearing Jan. 16 to determine if the winning bids will be accepted.

The Chowaikis owe GECU, El Paso's largest credit union, $5.84 million in loans tied to the properties, a court document shows. GECU has halted foreclosure actions against the properties pending the auction's outcome, Haugland said.

Several potential buyers have submitted contract offers for the properties, including Luby's, the Fuddruckers' franchisor, Haugland said. But the auction will determine the winning bids, he said.

The El Paso Central Appraisal District's tax appraisals of the properties have a combined total of $3.9 million. But Haugland said he expects the sale to garner more than $2 million for each property, or more than $6 million combined.

If the sale of the properties produce enough money to satisfy the Chowaikis' debts, a pending request to convert their Chapter 11 bankruptcy reorganization into a Chapter 7 liquidation may be withdrawn, Haugland reported.

One operating report filed with the bankruptcy court gave a snapshot of the restaurants' financial picture. The restaurants had sales of $2.8 million for the first 10 months of 2011, but recorded a loss of $214,554 after expenses, including almost $106,000 for Chowaiki management fees and $450,000 in rent to the Chowaikis' real estate company.

In their lawsuit, the Chowaikis claim food costs at the restaurants went from about 40 percent of total operating costs to below 30 percent after the Armendarizes were fired in early 2012. Employment costs also decreased and vending revenues increased, the lawsuit states. It alleges the Armendarizes had revenue meters removed from the restaurants' vending machines so money could be stolen from them.

Armando Armendariz was hired by the Chowaikis in February 2006 -- 17 months after their first Fuddruckers in East El Paso opened to large crowds. He later hired his wife to manage payroll, and hired his brother as a restaurant manager, the lawsuit states.

The lawsuit alleges the Armendarizes stole food from the restaurants, and that Armando Armendariz stole revenues from the restaurants' sales at several special events, including the Amigo Airshow. It alleges he routinely used restaurant money to buy food and restaurant equipment that he sold to other entities. It also alleges Armando and Yvette Armendariz ran side businesses selling and financing vehicles to restaurant employees and buying homes with embezzled restaurant money to rent to restaurant employees.

"By 2010, the (Chowaikis' companies) were in financial trouble as a result of the (Armendarizes') activities," the lawsuit states. "Although just a few years prior Armando and Yvette needed to borrow $5,000 (from the Chowaikis) to purchase a home, their schemes had now put them in a position" to lend $100,000 to the restaurants in March 2010, it states.

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